Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 2002
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
 
Commission File No. 000-30901
 
 
SUPPORTSOFT, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
94-3282005
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
575 Broadway
Redwood City, CA 94063
(Address of Principal Executive Offices)
(Zip Code)
 
Registrant’s Telephone Number, Including Area Code: (650) 556-9440
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨ .
 
On August 14, 2002, 33,507,063 shares of the Registrant’s Common Stock, $0.0001 par value, were outstanding.
 

Table of Contents
SUPPORTSOFT, INC.
 
FORM 10-Q
 
QUARTERLY PERIOD ENDED JUNE 30, 2002
 
INDEX
 
         
Page
Part I:
  
Financial Information
    
Item 1:
  
Financial Statements (Unaudited)
    
       
3
       
4
       
5
       
6
Item 2:
     
9
Item 3:
     
21
Part II:
  
Other Information
    
Item 4:
     
22
Item 6:
     
22
  
23
  
24

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Table of Contents
PART 1.    FINANCIAL INFORMATION
 
ITEM 1:    FINANCIAL STATEMENTS
 
SUPPORTSOFT, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
    
June 30,
2002
    
December 31,
2001
 
    
(unaudited)
        
Assets
                 
Current assets:
                 
Cash and cash equivalents
  
$
18,260
 
  
$
17,757
 
Short term investments
  
 
8,384
 
  
 
8,515
 
Accounts receivable, net
  
 
12,152
 
  
 
12,509
 
Other current assets
  
 
3,759
 
  
 
3,708
 
    
  
Total current assets
  
 
42,555
 
  
 
42,489
 
Property and equipment, net
  
 
1,826
 
  
 
1,932
 
Purchased intangibles, net
  
 
598
 
  
 
1,794
 
Other assets
  
 
147
 
  
 
148
 
    
  
    
$
45,126
 
  
$
46,363
 
    
  
Liabilities and Stockholders’ Equity
                 
Current liabilities:
                 
Accounts payable
  
$
773
 
  
$
1,331
 
Accrued compensation
  
 
1,981
 
  
 
1,867
 
Other accrued liabilities
  
 
1,643
 
  
 
1,793
 
Purchased technology obligation, current portion
  
 
1,449
 
  
 
1,449
 
Capital lease obligations, current portion
  
 
619
 
  
 
569
 
Deferred revenue
  
 
15,127
 
  
 
12,535
 
    
  
Total current liabilities
  
 
21,592
 
  
 
19,544
 
Capital lease obligations, net of current portion
  
 
232
 
  
 
663
 
Purchased technology obligation, net of current portion
  
 
309
 
  
 
927
 
Deferred revenue—long-term portion
  
 
2,385
 
  
 
932
 
Commitments and contingencies
                 
Stockholders’ equity:
                 
Common stock
  
 
3
 
  
 
3
 
Additional paid-in capital
  
 
107,853
 
  
 
108,031
 
Notes receivable from stockholders
  
 
(1,199
)
  
 
(1,523
)
Deferred stock compensation
  
 
—  
 
  
 
(997
)
Accumulated other comprehensive income (loss)
  
 
(109
)
  
 
95
 
Accumulated deficit
  
 
(85,940
)
  
 
(81,312
)
    
  
Stockholders’ equity
  
 
20,608
 
  
 
24,297
 
    
  
    
$
45,126
 
  
$
46,363
 
    
  
 
See accompanying notes.

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SUPPORTSOFT, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts; unaudited)
 
    
Three Months Ended
June 30,
    
Six Months Ended
June 30,
 
    
2002
    
2001
    
2002
    
2001
 
Revenue:
                                   
License fees
  
$
6,999
 
  
$
4,434
 
  
$
13,586
 
  
$
10,928
 
Services
  
 
2,467
 
  
 
1,847
 
  
 
4,645
 
  
 
3,957
 
    
  
  
  
Total revenue
  
 
9,466
 
  
 
6,281
 
  
 
18,231
 
  
 
14,885
 
    
  
  
  
Costs and expenses:
                                   
Cost of license fees
  
 
65
 
  
 
139
 
  
 
130
 
  
 
369
 
Cost of services
  
 
1,564
 
  
 
1,401
 
  
 
2,936
 
  
 
3,249
 
Amortization of purchased technology
  
 
598
 
  
 
766
 
  
 
1,196
 
  
 
1,616
 
Research and development
  
 
2,195
 
  
 
3,383
 
  
 
4,470
 
  
 
6,822
 
Sales and marketing
  
 
5,500
 
  
 
7,222
 
  
 
11,092
 
  
 
14,622
 
General and administrative
  
 
1,348
 
  
 
1,864
 
  
 
2,687
 
  
 
3,369
 
Amortization of deferred stock compensation (1)
  
 
108
 
  
 
1,230
 
  
 
578
 
  
 
2,684
 
    
  
  
  
Total costs and expenses
  
 
11,378
 
  
 
16,005
 
  
 
23,089
 
  
 
32,731
 
    
  
  
  
Loss from operations
  
 
(1,912
)
  
 
(9,724
)
  
 
(4,858
)
  
 
(17,846
)
Interest and other income, net
  
 
105
 
  
 
1,174
 
  
 
230
 
  
 
1,112
 
    
  
  
  
Net loss
  
 
(1,807
)
  
 
(8,550
)
  
 
(4,628
)
  
 
(16,734
)
    
  
  
  
Basic and diluted net loss per share
  
$
(0.06
)
  
$
(0.28
)
  
$
(0.14
)
  
$
(0.55
)
    
  
  
  
Shares used in computing basic and diluted net loss per share
  
 
32,318
 
  
 
30,918
 
  
 
32,164
 
  
 
30,678
 
    
  
  
  
(1)
 
Amortization of deferred stock compensation relates to the following:
    
Three Months Ended
June 30,
  
Six Months Ended
June 30,
    
2002
  
2001
  
2002
  
2001
Cost of services
  
 
5
  
 
54
  
 
25
  
 
118
Research and development
  
 
21
  
 
243
  
 
114
  
 
531
Sales and marketing
  
 
39
  
 
444
  
 
209
  
 
968
General and administrative
  
 
43
  
 
489
  
 
230
  
 
1,067
    
  
  
  
Total
  
$
108
  
$
1,230
  
$
578
  
$
2,684
    
  
  
  
 
See accompanying notes.

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SUPPORTSOFT, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
 
    
Six Months Ended
June 30,
 
    
2002
    
2001
 
Operating Activities
                 
Net loss
  
$
(4,628
)
  
$
(16,734
)
Adjustments to reconcile net loss to net cash used in operating activities:
                 
Depreciation and amortization
  
 
1,122
 
  
 
1,194
 
Amortization of deferred stock compensation
  
 
578
 
  
 
2,684
 
Amortization of purchased technology
  
 
1,196
 
  
 
1,616
 
Provision for bad debts
  
 
(214
)
  
 
(6
)
Other
  
 
—  
 
  
 
(66
)
Changes in assets and liabilities:
                 
Accounts receivable
  
 
571
 
  
 
(2,215
)
Prepaids and other current assets
  
 
(51
)
  
 
(346
)
Accounts payable
  
 
(558
)
  
 
1,716
 
Accrued compensation
  
 
114
 
  
 
92
 
Other accrued liabilities
  
 
(150
)
  
 
(2,216
)
Deferred revenue
  
 
4,045
 
  
 
(1,473
)
    
  
Net cash provided by (used in) operating activities
  
 
2,025
 
  
 
(15,754
)
    
  
Investing Activities
                 
Purchases of property and equipment
  
 
(1,016
)
  
 
(1,434
)
Other assets
  
 
1
 
  
 
(50
)
Payments on purchased technology obligation
  
 
(618
)
  
 
—  
 
Purchases of short-term investments
  
 
(5,902
)
  
 
(26,206
)
Sales and maturities of short-term investments
  
 
6,000
 
  
 
51,036
 
    
  
Net cash provided by (used in) investing activities
  
 
(1,535
)
  
 
23,346
 
    
  
Financing Activities
                 
Proceeds from issuance of common stock, net of repurchases
  
 
241
 
  
 
1,319
 
Repayment of notes receivable from shareholders
  
 
324
 
  
 
528
 
Principal payments under capital lease obligations
  
 
(381
)
  
 
(230
)
    
  
Net cash provided by (used in) financing activities
  
 
184
 
  
 
1,617
 
    
  
Effect of changes in foreign currency exchange rate on cash
  
 
(171
)
  
 
(69
)
Net increase in cash and cash equivalents
  
 
503
 
  
 
9,140
 
Cash and cash equivalents at beginning of period
  
 
17,757
 
  
 
11,756
 
    
  
Cash and cash equivalents at end of period
  
$
18,260
 
  
$
20,896
 
    
  
 
See accompanying notes.

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SUPPORTSOFT, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
(1)  Significant Accounting Policies:
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements include the accounts of SupportSoft, Inc. (the “Company” or “SupportSoft”) (formerly known as Support.com, Inc.) and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The balance sheet at June 30, 2002 and the statements of operations for the three and six months ended June 30, 2002 and 2001 and cash flows for the six months ended June 30, 2002 and 2001 are unaudited. In the opinion of management, these financial statements reflect all adjustments (consisting of normal reoccurring adjustments) that are necessary for a fair presentation of the results for and as of the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The condensed consolidated financial statement information as of December 31, 2001 is derived from audited financial statements as of that date. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 29, 2002. Certain prior period balances have been reclassified to conform to the current period presentation.
 
Financial Instruments
 
Estimated fair values of financial instruments are based on quoted market prices. The following is a summary of available-for-sale securities (in thousands) at June 30, 2002:
 
    
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
Cash
  
$
1,553
  
$
—   
  
$
—  
  
$
1,553
Money market funds
  
 
16,707
  
 
—  
  
 
  —  
  
 
16,707
Federal agencies
  
 
8,351
  
 
    33
  
 
—  
  
 
8,384
    
  
  
  
    
$
26,611
  
$
33
  
$
—  
  
$
26,644
    
  
  
  
Classified as:
                           
Cash and cash equivalents
  
$
18,260
  
$
—  
  
$
—  
  
$
18,260
Short-Term Investments
  
 
8,351
  
 
33
  
 
—  
  
 
8,384
    
  
  
  
    
$
26,611
  
$
33
  
$
—  
  
$
26,644
    
  
  
  
 
Revenue Recognition
 
License revenue is comprised of fees for term and perpetual licenses of SupportSoft’s software by corporate customers and resellers. Term licenses are sold with maintenance for which SupportSoft does not have vendor specific objective evidence (VSOE) to determine fair value as maintenance is not priced or offered separately in term licensing arrangements. SupportSoft therefore recognizes maintenance revenue and the term license fees over the service period of the arrangement as license revenue. If any portion of the fee for a term license with maintenance is payable in excess of 12 months from the date of the agreement, as is the case with the majority of our term license arrangements, the fee is considered to not be fixed or determinable and revenue is recognized ratably over the service period of the agreement commencing in the month in which the first payment is due. Revenue from perpetual license fees is recognized when persuasive evidence of an arrangement exists, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fee is fixed or determinable and collectibility is probable.

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License revenue from arrangements with resellers is recognized upon delivery limited by guaranteed minimum amounts received or due under the arrangement or sell through activity.
 
Services revenue is primarily comprised of revenue from professional services, such as consulting services and training and also includes maintenance under perpetual license arrangements.
 
Concentration of Credit Risk and Significant Customers
 
SupportSoft performs ongoing evaluations of its customers’ financial condition and generally does not require collateral. SupportSoft maintains reserves for credit losses, and such losses have been within management’s expectations. If the financial condition of SupportSoft’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional reserves may be required. The Company had reserves for credit losses at June 30, 2002 and December 31, 2001 of $614,000 and $828,000, respectively.
 
One customer accounted for 12% and another customer accounted for 20% of our total revenue for the three months ended June 30, 2002 and one customer accounted for 12% and another customer accounted for 13% of our total revenue for the six months ended June 30, 2002. No other customer individually accounted for 10% or more of our total revenue for either period.
 
Net Loss Per Common Share
 
Basic and diluted net loss per share are presented in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“FAS 128”), for all periods presented.
 
Basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase.
 
Had SupportSoft been in a net income position, diluted earnings per share would have included the shares used in the computation of basic net loss per share as well as the impact of common shares outstanding subject to repurchase and outstanding options and warrants to purchase an additional 7,658,027 and 7,790,558 shares, prior to the application of the treasury stock method, for the three and six months ended June 30, 2002. Such shares have been excluded because they are antidilutive for all periods presented.
 
The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data):
 
    
Three months ended
June 30,
    
Six months ended
June 30,
 
    
2002
    
2001
    
2002
    
2001
 
Net loss attributable to common shareholders
  
$
(1,807
)
  
$
(8,550
)
  
$
(4,628
)
  
$
(16,734
)
Basic and diluted:
                                   
Weighted-average shares of common stock outstanding
  
 
33,500
 
  
 
33,359
 
  
 
33,478
 
  
 
33,307
 
Less: Weighted-average shares subject to repurchase
  
 
(1,182
)
  
 
(2,441
)
  
 
(1,314
)
  
 
(2,629
)
    
  
  
  
Shares used in computing basic and diluted net loss per share
  
 
32,318
 
  
 
30,918
 
  
 
32,164
 
  
 
30,678
 
    
  
  
  
Basic and diluted net loss per share attributable to common stockholders
  
$
(0.06
)
  
$
(0.28
)
  
$
(0.14
)
  
$
(0.55
)
    
  
  
  
 
(2)  Purchased Intangibles
 
On September 20, 2000, SupportSoft purchased source code and other related intellectual property rights from ePeople, Inc. (formerly known as NoWonder, Inc.) for $6.8 million. The purchase price was recorded as purchased intangibles and included as an other asset in the Company’s consolidated balance sheet. The Company paid $5.2

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million through June 30, 2002, and will pay an additional $1.6 million in equal quarterly installments through the quarter ended September 30, 2003. The purchased technology is being amortized on a straight-line basis over two years. Total amortization related to the purchased intangibles for the six months ended June 30, 2002 was $1.2 million.
 
(3)  Recently Issued Accounting Standards
 
In July 2001, the FASB issued SFAS 142, “Goodwill and Other Intangible Assets.” SFAS 142 supersedes APB 17, “Intangible Assets,” and requires the discontinuance of goodwill amortization. In addition, SFAS 142 includes provisions regarding the reclassification of certain existing recognized intangibles as goodwill, reassessment of useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. SFAS 142 is required to be applied for fiscal years beginning after December 15, 2001, with certain early adoption permitted. The adoption of SFAS 142 during the quarter ended March 31, 2002 did not have a material impact on our financial position or results of operations. Additionally, there was no material impact on any prior period results upon adoption of SFAS 142.
 
In October 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for the impairment of long-lived assets. The adoption of SFAS 144 during the quarter ended March 31, 2002 did not have a material impact on our financial position or results of operations.
 
In July 2002, the FASB approved SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses the financial accounting and reporting for obligations associated with an exit activity, including restructuring, or with a disposal of long-lived assets. Exit activities include, but are not limited to, eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. SFAS No. 146 specifies that a company will record a liability for a cost associated with an exit or disposal activity only when that liability is incurred and can be measured at fair value. Therefore, commitment to an exit plan or a plan of disposal expresses only management’s intended future actions and, therefore, does not meet the requirement for recognizing a liability and the related expense. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. The Company does not anticipate that the adoption of SFAS No. 146 will have a material effect on its financial position or results of operations.
 
(4)  Comprehensive Loss
 
The following are the components of comprehensive loss: (in thousands)
 
    
Three months ended
June 30,
    
Six months ended
June 30,
 
    
2002
    
2001
    
2002
    
2001
 
Net loss
  
$
(1,807
)
  
$
(8,550
)
  
$
(4,628
)
  
$
(16,734
)
Net unrealized gain (loss) on available-for-sale securities
  
 
2
 
  
 
(41
)
  
 
(33
)
  
 
(10
)
Foreign currency translation losses
  
 
(69
)
  
 
(65
)
  
 
(171
)
  
 
(69
)
    
  
  
  
Comprehensive loss
  
$
(1,874
)
  
$
(8,656
)
  
$
(4,832
)
  
$
(16,813
)
    
  
  
  
 
The components of accumulated other comprehensive loss relate entirely to unrealized gains (losses) on available-for-sale securities and foreign currency translation losses and are $(109,000) at June 30, 2002 and $(52,000) at June 30, 2001.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
ITEM 2:
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with the unaudited condensed consolidated financial statements and related notes appearing in Item 1 of this report on Form 10-Q and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included in SupportSoft’s Annual Report on Form 10-K for the year ended December 31, 2001.
 
This report on Form 10-Q contains forward-looking statements. These statements relate to our, and in some cases our customers’, or alliance partners’, future plans, objectives, expectations, intentions and financial performance, as well as statements as to expected net losses, expected amortization of purchased technology, expected cash flows, the adequacy of capital resources, growth in operations, the ability to compete and respond to technological change and the acceptance and performance of our products and services. In some cases, you can identify forward-looking statements because they use terms such as anticipates, believes, continue, could, estimates, expects, intends, may, plans, potential, predicts, should or will or the negative of those terms or other comparable words. These statements involve risks and uncertainties that may cause our actual results, activities or achievements to be materially different from those expressed or implied by these statements. These risks and uncertainties include those listed under Factors that May Affect Future Results and Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
SupportSoft expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this report to conform these statements to actual results or changes in our expectations or in events, conditions or circumstances on which any such statement is based. You should not place undue reliance on these forward-looking statements, which apply only as of the date hereof.
 
Overview
 
SupportSoft is a leading provider of support automation software. SupportSoft sells to corporate enterprises, service providers and personal computer and device manufacturers that utilize its software platform to increase the efficiency and effectiveness of their support operations, while improving user responsiveness and satisfaction. SupportSoft sells its products primarily in the United States and, to a lesser extent in Europe, Asia, and Latin America through its direct and indirect sales force.
 
Substantially all of SupportSoft’s revenue has come from the license of our software products and from related services. We market our products through a combination of direct sales, resellers and information technology outsourcers.
 
We license our software under term and perpetual licenses. Term license revenue is recognized ratably over the service period of the agreement. Term licenses typically have a duration of 36 months, with three payments generally made at the beginning of each 12 month period. We began licensing software under term arrangements in June 1999. A majority of the licenses executed to date have been term-based.
 
RESULTS OF OPERATIONS
 
The following table sets forth the results of operations for the three and six months ended June 30, 2002 and 2001 expressed as a percentage of total revenue.
 
    
Three Months Ended
June 30,
    
Six Months Ended
June 30,
 
    
2002
    
2001
    
2002
    
2001
 
Revenue:
                           
License fees
  
74
%
  
71
%
  
75
%
  
73
%
Services
  
26
 
  
29
 
  
25
 
  
27
 
    
  
  
  
Net revenue
  
100
 
  
100
 
  
100
 
  
100
 
    
  
  
  
Costs and expenses:
                           
Cost of license fees
  
1
 
  
2
 
  
1
 
  
2
 
Cost of services
  
17
 
  
22
 
  
16
 
  
22
 
Amortization of purchased technology
  
6
 
  
12
 
  
7
 
  
11
 
Research and development
  
23
 
  
54
 
  
24
 
  
46
 
Sales and marketing
  
58
 
  
115
 
  
61
 
  
98
 
General and administrative
  
14
 
  
30
 
  
15
 
  
23
 
Amortization of deferred stock compensation
  
1
 
  
20
 
  
3
 
  
18
 
    
  
  
  
Total costs and expenses
  
120
 
  
255
 
  
127
 
  
220
 
Loss from operations
  
(20
)
  
(155
)
  
(27
)
  
(120
)
Interest income (expense) and other, net
  
1
 
  
19
 
  
2
 
  
8
 
    
  
  
  
Net loss
  
(19
)%
  
(136
)%
  
(25
)%
  
(112
)%
    
  
  
  

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Three and Six Months Ended June 30, 2002 and 2001
 
Revenue
 
Total revenue increased 51% to $9.5 million for the three months ended June 30, 2002 from $6.3 million for the three months ended June 30, 2001. Total revenue increased 22% to $18.2 million for the six months ended June 30, 2002 as compared to $14.9 million for the same period in 2001.
 
International revenue represented 23% and 21% of total revenues for both the three and six months ended June 30, 2002, and June 30, 2001, respectively.
 
One customer accounted for 12% and another customer accounted for 20% of our total revenue for the three months ended June 30, 2002 and one customer accounted for 12% and another customer accounted for 13% of our total revenue for the six months ended June 30, 2002. No other customer individually accounted for 10% or more of our total revenue for either period.
 
License revenue
 
License revenue increased to $7.0 million for the three months ended June 30, 2002 from $4.4 million for the three months ended June 30, 2001 and to $13.6 million for the six months ended June 30, 2002 from $10.9 million for the six months ended June 30, 2001. The increase in license revenue was due primarily to greater demand for and market acceptance of our software products and an increase in the sale of perpetual licenses. For the three months ended June 30, 2002 and 2001, revenue from perpetual licenses as a percentage of license fees was 47% and 7%, and as a percentage of total revenue was 35% and 5%. For the six months ended June 30, 2002 and 2001, revenue from perpetual licenses as a percentage of license fees was 43% and 17%, and as a percentage of total revenue was 32% and 13%, respectively. In some periods, the amount of term license revenue we recognize may vary due to factors including; the acceptance of product deliverables, the timing of payments received from our customers and the financial condition of our customers which may restrict or eliminate their ability to continue to pay for our software.
 
Services revenue
 
Service revenue increased to $2.5 million for the three months ended June 30, 2002 from $1.8 million for the three months ended June 30, 2001 and to $4.6 million for the six months ended June 30, 2002 from $4.0 million for the six months ended June 30, 2001. These increases were primarily due to increased maintenance revenue associated with the growth in our customer base from prior year, the overall number of maintenance contracts and to a lesser extent to an increase in implementation and consulting services performed.
 
Cost of Revenue
 
Cost of license fees
 
Cost of license fees consists primarily of costs related to license fees paid to third parties under technology license

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arrangements. Cost of license fees decreased to $65,000 for the three months ended June 30, 2002 from $139,000 for the three months ended June 30, 2001. Cost of license revenue for the six months ended June 30, 2002 decreased to $130,000 compared to $369,000 for the same period in 2001. The decreases were primarily due to decreased fees paid for third party technology that is sold with our products.
 
Cost of services
 
Cost of services consists primarily of salaries, travel costs, related overhead expenses and payments made to third parties for consulting services. Cost of services increased to $1.6 million for the three months ended June 30, 2002 from $1.4 million for the three months ended June 30, 2001. This increase was primarily due to an increase in consulting costs. Cost of services revenue for the six months ended June 30, 2002 decreased to $2.9 million compared to $3.2 million for the same period in 2001. This decrease was primarily due to a reduction in salary and related expenses.
 
Amortization of Purchased Intangibles
 
Amortization of purchased intangibles was $598,000 and $1.2 million for the three and six months ended June 30, 2002 compared to $766,000 and $1.6 million for the three and six months ended June 30, 2001. These decreases were attributable to a reduction in payments required to be made to ePeople pursuant to the acquisition agreement. We expect to fully amortize the remaining $598,000 related to this technology acquisition during the third quarter of 2002.
 
Research and Development Expense
 
Research and development expense consists primarily of payroll and consulting expenses and related costs for research and development personnel. Research and development expense decreased to $2.2 million for the three months ended June 30, 2002 from $3.4 million for the three months ended June 30, 2001. Research and development expense for the six months ended June 30, 2002 decreased to $4.5 million as compared to $6.8 million for the same period in 2001. These decreases were due primarily to a reduction in salary and related expenses and third party consulting expenses.
 
Sales and Marketing Expense
 
Sales and marketing expense consists primarily of payroll expense, including salaries and commissions and promotional expenses, including public relations, advertising and trade shows. Sales and marketing expense decreased to $5.5 million for the three months ended June 30, 2002 from $7.2 million for the three months ended June 30, 2001. Sales and marketing expense for the six months ended June 30, 2002 decreased to $11.1 million as compared to $14.6 million for the same period in 2001. These decreases were due to a number of factors including a reduction in salary, travel and promotional expenses, including public relations and trade shows.
 
General and Administrative Expense
 
General and administrative expense consists primarily of payroll expense and related costs of administrative personnel and professional fees for legal, accounting and other professional services. General and administrative expense decreased to $1.3 million for the three months ended June 30, 2002 from $1.9 million for the three months ended June 30, 2001. General and administrative expense for the six months ended June 30, 2002 decreased to $2.7 million as compared to $3.4 million for the same period in 2001. These decreases were due primarily to a reduction in salary and related expenses, fees for legal services, consulting fees and annual report costs.
 
Amortization of Deferred Stock Compensation
 
We amortized deferred compensation expense of approximately $108,000 and $578,000 for the three and six months ended June 30, 2002 as compared to $1.2 million and $2.7 million for the same periods in 2001. This compensation expense relates to options awarded to individuals in all operating expense categories. During the three months ended June 30, 2002, the deferred stock compensation balance was fully amortized.

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Interest and Other Income, Net
 
Interest and other income, net, was $105,000 and $230,000 for the three and six months ended June 30, 2002, as compared to $1.2 million and $1.1 million for the same periods in 2001. For the three months ended June 30, 2001, we realized a gain of $700,000 associated with the sale of our investment in commercial paper of a utility company which was deemed permanently impaired as of March 31, 2001. For the three months ended June 30, 2002, the decrease in interest and other income, net was due to lower cash, cash equivalents and short-term investments balances as well as the realized gain recognized in the second quarter of 2001 which did not reoccur during the second quarter of 2002. For the six months ended June 30, 2002, the decrease was primarily attributable to a decrease in interest income due to lower cash, cash equivalents and short-term investments balances.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Since our incorporation in December 1997, we have financed our operations primarily through our initial public offering, through the private placement of our preferred and common stock, and to a lesser extent through bank borrowings, capital equipment lease financing and cash flow from operations.
 
Operating Activities
 
Net cash provided by operating activities was $2.0 million for the six months ended June 30, 2002, an increase of $17.8 million over the $15.8 million used in operating activities during the six month period ended June 30, 2001. Amounts included in net loss, which do not require the use of cash, including amortization of deferred stock compensation, amortization of purchased intangibles, depreciation of fixed assets and the provision for bad debt, amounted to $2.7 million for the six months ended June 30, 2002 compared to $5.5 million for the six months ended June 30, 2001. Net cash provided by operating activities for the six month period ended June 30, 2002 was also the result of an increase of $4.0 million in deferred revenue and a decrease in accounts receivable of $571,000, offset by a net loss of $4.6 million and a decrease in accounts payable of $558,000.
 
Investing Activities
 
Net cash used in investing activities was $1.5 million for the six months ended June 30, 2002, a decrease of $24.9 million over the $23.3 million provided by the investing activities for the comparable period ended June 30, 2001. Net cash used in investing activities for the six months ended June 30, 2002 was primarily due to the purchase of $5.9 million in short-term investments and $1.0 million in property and equipment offset by the sale or maturity of $6.0 million in short-term investments.
 
Financing Activities
 
Net cash provided by financing activities was $184,000 for the six months ended June 30, 2002 and $1.6 million for the six months ended June 30, 2001. For the period ended June 30, 2002, cash provided by financing activities was attributable primarily to net proceeds from the repayment of notes receivable from shareholders and to a lesser extent the purchase of common stock under the Employee Stock Purchase Plan offset by principal payments under capital lease obligations.
 
Commitments
 
As of June 30, 2002, our principal commitments consisted of obligations outstanding under a technology acquisition agreement and capital and operating leases. We anticipate requiring minimal additional space in the next 12 months. The following summarizes our contractual obligations as of June 30, 2002 and the effect these contractual obligations are expected to have on our liquidity and cash flows in future periods (in thousands).

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Payments Due By Period
    
Total
  
1 Year
or Less
  
1–3
Years
  
After
3 Years
Purchased technology
  
$
1,758
  
$
1,449
  
$
309
  
$
—  
Capital lease obligations
  
 
851
  
 
619
  
 
232
  
 
—  
Operating leases
  
 
1,974
  
 
1,102
  
 
651
  
 
 221
    
  
  
  
Total
  
$
4,583
  
$
3,170
  
$
1,192
  
$
221
    
  
  
  
 
Working Capital and Capital Expenditure Requirements
 
We believe that our existing cash balances will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. We evaluate potential acquisitions of other businesses, products and technologies and may in the future require additional equity or debt financings to accomplish any potential acquisitions.
 
If we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional equity or debt securities. The sale of additional equity or debt securities could result in more dilution to our stockholders. Financing arrangements may not be available to us, or may not be available in amounts or on terms acceptable to us.
 
Critical Accounting Policies and Estimates
 
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Our significant accounting policies are described in Note 1 to the consolidated financial statements. The items in our financial statements requiring significant estimates and judgments include revenue recognition and allowance for bad debt.
 
Revenue Recognition
 
We license our software under term and perpetual licenses. License revenue is generally recognized when a customer agreement has been signed, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed or determinable, and collection is considered probable. If any of these criteria are not met, revenue recognition is deferred until all of the criteria are met. We sell our term licenses with maintenance for which we do not have vendor specific objective evidence to determine fair value. As a result, license revenue for term licenses is recognized ratably over the service period of the agreement, and license revenue includes maintenance for term licenses. We do not allocate maintenance revenue from term licenses to services revenue as we do not believe there is an allocation methodology that provides a meaningful and supportable allocation between license and maintenance revenues. SupportSoft considers all arrangements with payment terms extending beyond 12 months and other arrangements with payment terms longer than normal not to be fixed or determinable. If the fee is determined not to be fixed or determinable, revenue is recognized as payments become due from the customer. License revenue from arrangements with resellers is recognized ratably over the term of the arrangement commencing when payments are received or become due limited by guaranteed minimum amounts received or due under the arrangement or sell through activity.
 
Term licenses typically have a duration of 36 months, with pre-payments generally billed to the customer at the beginning of each 12 month period. If we receive an order from a customer for a 36-month term license in December of a year, we would recognize only one month of license fees for that year even if that customer prepaid 12 months of the 36-month term. Pursuant to this agreement, we would record one year of contract fees in accounts receivable upon signing a new term license agreement, while recognizing only one month of revenue. As a result, our accounts receivable balance could represent a significant portion of our total revenue and increase our days sales

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outstanding (DSO) calculation. We began licensing software under term arrangements in June 1999. A majority of the licenses executed to date have been term-based.
 
Term and perpetual licensing arrangements may include service elements. Services revenue is primarily comprised of revenue from professional services, such as consulting services, training, maintenance and support. Arrangements that include software services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When software services are considered essential, revenue under the arrangement is recognized using contract accounting. When software services are not considered essential, the revenue related to the software services is recognized as the services are performed.
 
Allowance for Bad Debt
 
SupportSoft maintains reserves for estimated credit losses resulting from the inability of its customers to make required payments. A considerable amount of judgment is required when we assess the realization of receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of SupportSoft’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional reserves may be required.
 
Chief Executive Officer and Chief Financial Officer Certifications
 
The certification by the Company’s chief executive officer and chief financial officer of this report on Form 10-Q, as required by section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), has been submitted to the Securities and Exchange Commission as additional correspondence.
 
Factors that May Affect Future Results
 
We have a history of losses and if we do not become profitable, we may not be able to continue to operate.
 
We incurred net losses of approximately $85.9 million for the period from December 3, 1997 through June 30, 2002. If we do not become profitable within the timeframe we predicted or expected by securities analysts or investors, the market price of our stock will likely decline. If we continue to incur net losses, we may not be able to increase our number of employees or our investment in capital equipment, sales, marketing and research and development programs. We do not know when or if we will become profitable. If we do achieve profitability, we may not sustain or increase profitability in the future and therefore may not be able to continue to operate. However, we believe that our existing cash balances will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.
 
Our quarterly results are difficult to predict and may fluctuate. If we do not meet quarterly financial expectations, our stock price would likely decline.
 
Because of our limited operating history, our quarterly revenue and operating results are difficult to predict and may fluctuate from quarter to quarter. Our operating results in some quarters may fall below our predictions or the expectations of securities analysts or investors, which would likely cause the market price of our common stock to decline.
 
Several factors are likely to cause fluctuations in our operating results, including:
 
 
•
 
demand for our support automation software;
 
 
•
 
the price and mix of products and services we or our competitors offer;
 
 
•
 
our ability to retain customers; and
 
 
•
 
the amount and timing of operating costs and capital expenditures relating to expansion of our business, infrastructure and marketing activities.
 
Our quarterly results depend on the size of a small number of orders, so the delay or loss of any single large order during a quarterly period, and especially an order for a perpetual license rather than a term license, could harm that quarter’s results and cause our stock price to decline.
 
Our operating results could suffer if any large orders are delayed or cancelled in any future period. Each quarter, we

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derive a significant portion of our license revenue from a small number of relatively large orders for the licensing of our support automation software. We license our support automation software under perpetual and term licenses. Perpetual licenses typically result in our recognition of a larger amount of revenue in the quarter in which the license is granted as compared with term licenses. Revenue from a perpetual license is generally recognized upon delivery of a product. Revenue from a term license is recognized on a monthly basis over the agreement term, which is typically three years. We expect that we will continue to depend upon a small number of large orders for a significant portion of our license revenue.
 
Because a small number of customers have historically accounted for and may in future periods account for substantial portions of our revenue, our revenue could decline because of delays of customer orders or the failure of existing customers to renew licenses.
 
For the three months ended June 30, 2002, two of our customers accounted for 10% or more of our total revenue. Collectively, these customers represented 32% of our total revenue. Because we have a small number of customers and a few customers are likely to continue to account for a significant portion of our revenue, our revenue could decline because of the loss or delay of a single customer order or the failure of an existing customer to renew its term license. We may not obtain additional customers. The failure to obtain additional customers, the loss or delay of customer orders and the failure of existing customers to renew licenses will harm our operating results.
 
Our sales cycle can be lengthy and if revenue forecasted for a particular quarter is not realized in that quarter, significant expenses incurred may not be offset by corresponding sales.
 
Our sales cycle for our support automation software can range from one week to nine months or more and may vary substantially from customer to customer. While our customers are evaluating our products and services, we may incur substantial sales and marketing expenses and spend significant management effort. Any delay in completing sales in a particular quarter could cause our operating results to be below expectations.
 
We must achieve broad adoption and acceptance of our support automation products and services or we will not increase our market share or grow our business.
 
We must achieve broad market acceptance and adoption of our products and services or our business and operating results will suffer. Specifically, we must encourage our customers to transition from using traditional support methods. To accomplish this, we must:
 
 
•
 
continually improve the performance, features and reliability of our products and services to address changing industry standards and customer needs; and
 
 
•
 
develop integration with other support-related technologies.
 
Our product innovations may not achieve the market penetration or price stability necessary for profitability.
 
If we fail to develop, in a timely manner, new or enhanced versions of our support automation software or to provide new products and services that achieve rapid and broad market acceptance or price stability, we may not become profitable. We may fail to identify new product and service opportunities successfully. Our existing products will become obsolete if we fail to introduce new products or product enhancements that meet new customer demands, support new standards or integrate with new or upgraded versions of packaged applications. We may have little or no control over the factors that might influence market acceptance of our products and services. These factors include:
 
 
•
 
the willingness of enterprises to transition to automated support and
 
 
•
 
acceptance of competitors’ automated support solutions.
 
Our software may not operate with the hardware and software platforms that are used by our customers now or in the future, and as a result our business and operating results may suffer.
 
We currently serve a customer base with a wide variety of constantly changing hardware, packaged software

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applications and networking platforms. If there is widespread adoption of other operating system environments, and if we fail to release versions of our support automation software that are compatible with these other operating systems, our business and operating results will suffer. Our future success also depends on:
 
 
•
 
our ability to integrate our product with multiple platforms and to modify our product as new versions of packaged applications are introduced;
 
 
•
 
the number of different operating systems and databases that our product can work with; and
 
 
•
 
our management of software being developed by third parties for our customers or for use with our products.
 
We rely on third-party technologies and our inability to use or integrate third-party technologies could delay product or service development.
 
We intend to continue to license technologies from third parties, including applications used in our research and development activities and technologies, which are integrated into our products and services. Our inability to obtain or integrate any of these licenses could delay product and service development until equivalent technology can be identified, licensed and integrated. These technologies may not continue to be available to us on commercially reasonable terms or at all. We may fail to successfully integrate any licensed technology into our products or services. This would harm our business and operating results. Third-party licenses also expose us to increased risks that include:
 
 
•
 
risks of product malfunction after new technology is integrated;
 
 
•
 
the diversion of resources from the development of our own proprietary technology; and
 
 
•
 
our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs.
 
We may engage in future acquisitions or investments that could dilute our existing stockholders, or cause us to incur significant expenses.
 
We may acquire or invest in complementary businesses, technologies or products. If we are unable to use or integrate any newly acquired entities or technologies effectively or profitably, our operating results could suffer. Acquisitions by us could also result in large and immediate write-offs, incurrence of debt and contingent liabilities or amortization of expenses related to goodwill and other intangibles, which could harm our operating results. Additional funds to finance any acquisitions may not be available on terms that are favorable to us, or at all, and, in the case of equity financings, may dilute our stockholders.
 
We may lose the services of our key personnel, which in turn would harm the market’s perception of our business and our ability to achieve our business goals.
 
Our success will depend on the skills, experience and performance of our senior management, engineering, sales, marketing and other key personnel. The loss of the services of any of our senior management or other key personnel, including our chief executive officer, Radha R. Basu, our chief financial officer, Brian Beattie, our chief technical officer, Scott W. Dale, and our chief software officer, Cadir B. Lee, could harm the market’s perception of our business and our ability to achieve our business goals.
 
Our failure to establish and expand strategic alliances would harm our ability to achieve market acceptance of our support automation software.
 
If we fail to maintain, establish or successfully implement strategic alliances, our ability to achieve market acceptance of our automation software will suffer and our business and operating results will be harmed. Specifically, we must establish and extend existing distribution alliances with specialized technology and services firms such as support outsourcers. We must also establish and extend existing solutions alliances with leading providers of complementary support technologies, including call center or help desk management companies, knowledge management companies

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and systems management firms.
 
Our products depend on and work with products containing complex software and if our products fail to perform properly due to errors or similar problems in the software, we may need to spend resources to correct the errors or compensate for losses from these errors and our reputation could be harmed.
 
Our products depend on complex software, both internally developed and licensed from third parties. Also, our customers may use our products with other companies’ products which also contain complex software. Complex software often contains errors. These errors could result in:
 
 
•
 
delays in product shipments;
 
 
•
 
unexpected expenses and diversion of resources to identify the source of errors or to correct errors;
 
 
•
 
damage to our reputation;
 
 
•
 
lost sales;
 
 
•
 
product liability claims; and
 
 
•
 
product returns.
 
Our system security is important to our customers and we may need to spend significant resources to protect against or correct problems caused by security breaches.
 
A fundamental requirement for online communications, transactions and support is the secure transmission of confidential information. Third parties may attempt to breach our security or that of our customers. We may be liable to our customers for any breach in security and any breach could harm our business and reputation. Also, computers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. We may be required to expend significant capital and other resources to further protect against security breaches or to correct problems caused by any breach.
 
We may face claims of invasion of privacy or inappropriate disclosure, use or loss of our customers’ information and any liability imposed could harm our reputation and cause us to lose customers.
 
Our software contains features which may allow us or our customers to control, monitor or collect information from computers running the software without notice to the computing users. Therefore we may face claims about invasion of privacy or inappropriate disclosure, use or loss of this information. Any imposition of liability could harm our operating results.
 
We have limited experience in international operations and if our revenue from international operations does not exceed the expense of establishing and maintaining our international operations, our business could suffer.
 
We intend to expand further into international markets. We have limited experience in international operations and may not be able to compete effectively in international markets. If we do not generate enough revenue from international operations to offset the expense of these operations, our business could suffer. Risks we face in conducting business internationally include:
 
 
•
 
difficulties and costs of staffing and managing international operations;
 
 
•
 
differing technology standards;
 
 
•
 
longer sales cycles and collection periods;
 
 
•
 
changes in currency exchange rates and controls;

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•
 
dependence on local vendors; and
 
 
•
 
the effects of the terrorist attacks in the United States and the effects of the war on terrorism and any related conflicts or similar events worldwide.
 
Any system failure that causes an interruption in our customers’ ability to use our products or services or a decrease in their performance could harm our relationships with our customers and result in reduced revenue.
 
Our software may depend on the uninterrupted operation of our internal and outsourced communications and computer systems. These systems are vulnerable to damage or interruption from computer viruses, human error, natural disasters and intentional acts of vandalism and similar events. We have no formal disaster recovery plan and business interruption insurance may not be enough to compensate us for losses that occur. These problems could interrupt our customers’ ability to use our support automation products or services which could harm our reputation and cause us to lose customers and revenue.
 
We may not obtain sufficient patent protection, and this could harm our competitive position and increase our expenses which would harm our business.
 
Our success and ability to compete depend to a significant degree upon the protection of our software and other proprietary technology. It is possible that:
 
 
•
 
our pending patent applications may not be issued;
 
 
•
 
competitors may independently develop similar technologies or design around any of our patents;
 
 
•
 
patents issued to us may not be broad enough to protect our proprietary rights; and
 
 
•
 
our issued patents could be successfully challenged.
 
We rely upon trademarks, copyrights and trade secrets to protect our proprietary rights and if these rights are not sufficiently protected, it could harm our ability to compete and to generate revenue.
 
We also rely on a combination of laws, such as copyright, trademark and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. Our ability to compete and grow our business could suffer if these rights are not adequately protected. Our proprietary rights may not be adequately protected because:
 
 
•
 
laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies; and
 
 
•
 
policing unauthorized use of our products and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of this unauthorized use.
 
Also, the laws of other countries in which we market our products may offer little or no protection of our proprietary technologies. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for them, which would harm our competitive position and market share.
 
We may face intellectual property infringement claims that could be costly to defend and result in our loss of significant rights.
 
Other parties may assert intellectual property infringement claims against us and our products may infringe the intellectual property rights of third parties. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our business. If there is a successful claim of infringement, we may be required to develop non-infringing technology or enter into royalty or license agreements which may not be available on acceptable terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a

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timely basis would harm our business. Our products may infringe issued patents that may relate to our products.
 
Also, patent applications may have been filed by third parties which relate to our software products. The adoption of the new trademark and corporate name SupportSoft increases the risk that a prior user could view the mark or name to be confusingly similar to the prior user’s mark or name. Although the we have conducted limited trademark and trade name searches, and do not believe the SupportSoft trademark and corporate name will infringe any known party’s trademark rights, it is possible that a third party will claim our use of SupportSoft infringes its trademark.
 
We must compete successfully in the support automation market or we will lose market share and our business will fail.
 
The market for our products is intensely competitive, rapidly changing and significantly affected by new product introductions and other market activities of industry participants. Competitive pressures could reduce our market share or require us to reduce the price of products and services and therefore our gross margin, which could harm our business and operating results. Our integrated software solution competes against various vendors’ software products designed to accomplish specific elements of a complete support automation solution. For example, in the market for automated delivery of support solutions, we compete with Motive Communications, Inc.
 
We may encounter competition from companies such as:
 
 
•
 
customer communications software companies;
 
 
•
 
question and answer companies;
 
 
•
 
customer relationship management solution providers;
 
 
•
 
consolidated service desk solution vendors;
 
 
•
 
Internet infrastructure companies; and
 
 
•
 
operating systems providers.
 
Our potential competitors may have longer operating histories, significantly greater financial, technical, and other resources or greater name recognition than we do. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements. If we fail to compete effectively, we may lose or be unable to expand our market share and our business and operating results would suffer.
 
Because our support automation software is designed to support businesses operating over the Internet, our success depends on the continued growth and levels of performance of Internet usage.
 
Because a majority of our products are designed to support businesses operating over the Internet, the success of our business will depend on the continued improvement of the Internet as a convenient means of consumer interaction and commerce, as well as an efficient medium for the delivery and distribution of information by enterprises to their employees and extended enterprise. Because global commerce on the Internet and the online exchange of information is evolving, we cannot predict whether the Internet will continue to be a viable commercial marketplace.
 
We may experience a decrease in market demand due to the slowing economy in the United States which has been further stymied by the recent outbreak of terrorism, war and social and political instability.
 
Economic growth has slowed significantly, and some analysts believe the United States economy will experience a recession. In addition, the terrorists attacks in the United States and turmoil in the Middle East have increased the uncertainty in the United States economy and may further add to the decline in the United States economy. The war on terrorism, along with the effects of the terrorist attack and other similar events, could have contributed to the further slowdown of the already slumping market demand for goods and services, including support automation software. If the economy continues to decline as a result of the recent economic, political and social turmoil, or if there are further terrorist attacks in the United States or elsewhere, we may experience decreases

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in the demand for our products and services, which may harm our operating results.
 
Governmental regulation and legal changes could impair the growth of the Internet and decrease demand for our products or increase our cost of doing business.
 
The laws and regulations that govern our business change rapidly. Any change in laws and regulations could impair the growth of the Internet and could reduce demand for our products, subject us to liability or increase our cost of doing business. The United States government and the governments of states and foreign countries have attempted to regulate activities on the Internet and the distribution of software. Also, in 1998, Congress passed the Internet Freedom Act, which imposes a three-year moratorium on state and local taxes on Internet-based transactions. Failure to renew this moratorium would allow states to impose taxes on e-commerce. This might harm our business directly and indirectly by harming the businesses of our customers, potential customers and the parties to our business alliances. The applicability to the Internet of existing laws governing issues is uncertain and may take years to resolve. Evolving areas of law that are relevant to our business include privacy laws, intellectual property laws, proposed encryption laws, content regulation and sales and use tax laws and regulations.
 
We may experience power blackouts and higher electricity prices if there is a recurrence of California’s recent energy crisis, which could disrupt our operations and increase our expenses.
 
California recently experienced an energy crisis. If this were to occur again, it could disrupt our operations and increase our expenses. We rely on the major Northern California public utility, Pacific Gas & Electric Company, or PG&E, to supply electric power to our headquarters in Northern California. Due to problems associated with the de-regulation of the power industry in California and shortages in wholesale electricity supplies, customers of PG&E have been faced with increased electricity prices, power shortages and, in some cases, rolling blackouts. If blackouts interrupt our power supply, we may be temporarily unable to continue to operate our central computer, hardware and support systems. Any interruption in our ability to continue our operations could delay our ability to develop or provide our products and support services, which could damage our reputation and result in lost revenue, either of which could substantially harm our business and results of operations.
 
Our directors, executive officers and principal stockholders own a substantial portion of our common stock and this concentration of ownership may allow them to elect most of our directors and could delay or prevent a change in control of SupportSoft.
 
Our directors, executive officers and stockholders who currently own over 5% of our common stock collectively beneficially own a substantial portion of our outstanding common stock. These stockholders, if they vote together, will be able to significantly influence all matters requiring stockholder approval. For example, they may be able to elect most of our directors, delay or prevent a transaction in which stockholders might receive a premium over the market price for their shares or prevent changes in control or management.
 
Our stock price may be highly volatile and may decline significantly because of stock market fluctuations and other factors that affect the prices of technology stocks. A decline in our stock price could result in securities class action litigation against us, that could divert management's attention and harm our business.
 
The stock market has experienced significant price and volume fluctuations that have adversely affected the market prices of common stock of technology companies. These broad market fluctuations may reduce the market price of our common stock. Other factors that may lead to high volatility or have an adverse affect on the market price of our common stock include:
 
 
•
 
actual or anticipated fluctuations in our operating results;
 
 
•
 
changes in or our failure to meet securities analysts’ expectations; and
 
 
•
 
sales of shares of our common stock by our affiliates or others.
 
In the past, securities class action litigation has often been brought against a company after periods of volatility in the market price of securities. We may in the future be a target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources, which could harm our ability to execute our business plan.
 
We may need additional capital and if funds are not available on acceptable terms, we may not be able to hire and retain employees, fund our expansion or compete effectively.
 
We believe that our existing capital resources will enable us to maintain our operations for at least the next 12 months. However, if our capital requirements vary materially from those currently planned, we may require additional financing sooner than anticipated. This financing may not be available in sufficient amounts or on terms acceptable to us and may be dilutive to existing stockholders. If adequate funds are not available or are not available on acceptable terms, our ability to hire, train or retain employees, to fund our expansion, take advantage of unanticipated opportunities, develop or enhance services or products, or respond to competitive pressures would be significantly limited.

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ITEM 3:    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Qualitative and Quantitative Disclosures about Market Risk
 
We develop products in the United States and market and sell in North America, South American, Asia and Europe. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As all sales are currently made in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets. Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. Because of the nature of our short-term investments, we have concluded that there is no material market risk exposure.
 
Our investment policy requires us to invest funds in excess of operating requirements in:
 
 
•
 
obligations of the U.S. government and its agencies;
 
 
•
 
investment grade state and local government obligations; and
 
 
•
 
money market funds or deposits issued or guaranteed by U.S. and non-U.S. commercial banks, meeting credit rating and net worth requirements with maturities of less than two years.
 
At June 30, 2002, our cash and cash equivalents consisted primarily of money market funds held by large institutions in the U.S. and our short-term investments were invested in government debt securities maturing in less than eighteen months.

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PART II:    OTHER INFORMATION
 
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
On May 28, 2002, we held our annual stockholders’ meeting. At such meeting, the following actions were voted upon:
 
(a)  Election of the following directors to serve until the 2003 Annual Meeting of Stockholders and thereafter until their successors are elected and qualified:
 
Director
  
Votes For
    
Votes Withheld
Radha R. Basu
  
22,672,686
    
20,222
Manuel F. Diaz
  
22,672,686
    
12,722
Bruce Golden
  
22,672,120
    
13,288
Claude M. Leglise
  
22,672,686
    
12,722
Edward S. Russell
  
22,672,120
    
13,288
Roger J. Sippl
  
22,672,686
    
12,722
 
(b)  To ratify the appointment of Ernst & Young as the Company’s independent auditors for the fiscal year ending December 31, 2002:
 
Votes For
 
Votes Against
  
Abstentions
  
Non-Votes
22,593,911
 
90,957
  
540
  
7,500
 
ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K
 
(a)  Exhibits
 
See Exhibit Index attached hereto, which is incorporated herein by reference.
 
(b)  Reports on Form 8-K:
 
During the quarter ended June 30, 2002, the Registrant filed the following reports on Form 8-K:
 
Date Filed
 
Date of Report
 
Item Number
    
Financial Statements Required
June 28, 2002
 
June 28, 2002
 
5. Other events
    
None

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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
August 14, 2002
     
SUPPORTSOFT, INC.
           
By
 
/s/    B RIAN M. B EATTIE        
               
Brian M. Beattie
Senior Vice President of Finance and Administration and Chief Financial Officer
(Principal Financial Officer, Chief Accounting Officer and Duly Authorized Signatory)

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EXHIBIT INDEX TO SUPPORTSOFT, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
 
Exhibit Number
  
Description
4.1
  
Form of Common Stock Certificate.

24
   
FORM OF COMMON STOCK CERTIFICATE
 
Exhibit 4.1
 
LOGO

 
SupportSoft, Inc.
 
A statement of all of the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights as established by the certificate of Incorporation, as amended, may be obtained by any stockholder upon request and without charge from the principal office of the Corporation.
 
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to aplicable laws or regulations:
 
TEN COM
 
— as tenants in common
TEN ENT
 
— as tenants by the entireties
JT TEN
 
— as joint tenants with right of survivorship and not as tenants in common
 
UNIF GIFT MIN ACT —                          Custodian                         
                                                   (Cust)                                 (Minor)
under Uniform Gifts to Minors Act                                         
                                                                         (State)
 
 
UNIF TRF MIN ACT —                          Custodian (until age          )
                                                   (Cust)
                         under Uniform Transfers to Minors Act                                         
    (Minor)                                                                                          (State)
 
Additional abbreviations may also be used though no in the above list.
 
 
ASSIGNMENT
 
 
For Value Received                                                                                                                hereby sell(s), assigns(s) and transfer(s) unto
 
 
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
 
 
 
(please print or typewrite name and address, including zip code of assignee(s)
 
 
 
 
 
 
of the Shares of capital stock represented by the within Certificate and do(es) hereby irrevocably constitute and
 
appoint                                                                                                                                                                                               Attorney
 
to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises.
 
 
Dated                                           



 
                                                                                                                               
 
 
 
                                                                                                                               
NOTE:  The signature to this assignment must correspond with the names as written upon the face of the certificate in every particular, without alteration or enlargement or any change whatever. Signature must be guaranteed.
 
 
 
Signature(s) Guaranteed:
 
 
By                                                                                                                                                                                                          
THE SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM) PURSUANT TO S.E.C. RULE 17Ad-15.